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Investment Overview for E-Trade (NASDAQ:ETFC)
Below are key drivers of E-Trade's value that present opportunities for upside or downside to the current Trefis price estimate for E-Trade:
Net Interest on Assets
- E-Trade's Interest Earning Assets: E-Trade's Interest Earning Assets are largely comprised of loans, mortgage-backed securities and investment securities. Following the financial crisis, the company asset balances fell consistently before bouncing back in 2012. However, E-Trade's deleveraging initiatives resulted in further declines in 2013 and 2014 before a modest improvement in 2015. We currently forecast steady growth in these assets through our forecast period, eventually reaching $46 billion. However, should the growth be slower than expected - due to intense competition and any further need to deleverage the balance sheet - and these assets remain around $40 billion in the long run, there would be a potential downside of 7% to our price estimate.
- E-Trade's Net Interest Yield on Loans, Deposits & Securities : E-Trade's net interest yield has been below 3% in recent years, primarily influenced by the low interest rate environment prevalent in the U.S. The yield hit a low of 2.40% in 2013 before increasing to 2.63% in 2014 and 2.73% in 2015. With the Fed's rate hike underway, we expect yields to rise to around 3.6% by 2021. However, if the interest rate hike takes longer than expected, and and the net yield only rises to about 3% during the same timeframe, there would be a downside of 10% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for E-Trade at the top of the page.
E-Trade is a financial services company that provides online brokerage, and related products and services, primarily to individual retail investors.
E-Trade also provides investor-focused banking products, mostly sweep deposits and savings products, to retail investors. It primarily generates revenue by earning interest on loans and deposits in brokerage accounts, as well as commissions on trades.
E-Trade's primary value comes from the net interest it earns on its assets.
Large interest-earning asset base
E-Trade's interest earning assets peaked at $56 billion in 2007, before the credit crisis began. In 2015, E-Trade had interest earning assets of about $40.8 billion and earned a net yield of 2.73% on these assets, amounting to about $1.1 billion in net interest income. We expect that assets and yields will gradually rise going forward, due to a recovery in macroeconomic conditions and an improving interest rate environment in the U.S.
More accounts and activity drive commissions
E-Trade had about 3.2 million brokerage accounts in 2015 and the average account generated about 12.1 trades annually, from which E-Trade earned an average trading commission revenue of about $10.87. We expect modest growth in these metrics going forward, which should lead to solid revenue growth.
Intense competition to pressure pricing
The online financial services market continues to evolve rapidly and we expect it to remain highly competitive. E-Trade's trading and investing segment competes with full commission brokerage firms, online brokerages - including low-fee and no-fee trading apps - and market-making firms. Many competitors have cut their fees in order to attract new clients. Accordingly we do not expect that E-Trade will be able to raise pricing going forward, which will put pressure on average revenue per trade.
Recovering market to drive volumes
As market conditions improve, we expect investors' risk appetite to increase, which should drive a recovery in trade volumes as new customers join the brokerage and existing users increase their activity.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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